M. Hasan
M. Hasan is Chairman of the Indonesian Forestry Community
An analysis of the transformation of the Indonesian forest industry from world leader in tropical log exports to world leader in tropical plywood exports.
The legal foundation for forestry development and management was laid by the Soeharto government in 1967 with the enactment of Law No. 5 which designates forests and all the natural resources within them as property of the state. However, the government was empowered to cooperate with other parties in managing the forests; states and private companies, businesses owned by provincial governments and other legal bodies established under Indonesian law could obtain rights to manage and exploit forest resources.
Given the lack of infrastructure and the immediate need for external revenue, investment in forest industry was directed toward the extraction and export of logs, a trend that continued through the late 1970s. In fact, during the period 1978-1980 Indonesia became the world's largest exporter of tropical hardwood logs, touching an export volume of 20 million m³ in 1980. During this same period the countries that imported logs from Indonesia became world leaders in the production of tropical hardwood products, mainly wood-based panels.
A critical examination of the export-oriented approach of this period reveals a number of points. During the period 1970-1980, the Indonesian forest industry was in its very early stages of development and was not in a position to make the investment necessary for establishing processing industries. The large-scale exports of logs enabled the industry and the country to acquire sufficient financial strength from their own resources. It was in this export period that the infrastructure for logging equipment, roads, jetties, etc. - was developed: facilities that would later prove essential.
More than 40 tonnes of meranti timber ready for transport to the plywood mills
In addition, the countries that imported Indonesia's logs promoted plywood made from Indonesian timber in Europe, North America and other regions. This helped to establish a large export market that could be exploited by the Indonesian industry at a later stage but offered little incentive for sustainable forest management.
An industry based on massive log exports had many shortcomings; it allowed logging companies to accumulate large profits while providing little incentive for the development of a national wood processing industry. Relatively few employment opportunities were created for Indonesians and the log importers created a single-species orientation by buying mainly meranti (Shorea and Parashorea spp.), one of the best tropical timbers for plywood production. Moreover, Indonesian exports were heavily dependent on relatively few markets namely Japan, the Republic of Korea and Taiwan (Province of China) and therefore provided no guarantee of steady export earnings in the long term.
In 1975, recognizing the economic and ecological role of the forests, the Indonesian Government initiated a programme aimed at a gradual reduction in log exports. This programme culminated in a complete ban on log exports in 1985.
Parallel to the decrease in log exports, Indonesia moved ahead strongly in interrelated areas: development of the domestic wood processing industry; and intensified management of production forest resources.
With the decrease and eventual elimination of log exports, the forestry industry shifted dramatically to the production of more added-value products. Following the example of the countries that had formerly been the major importers of Indonesian roundwood, the plywood industry was chosen as the nucleus of the wood-based industry, both for its income and employment-generating potential.
The plywood industry had its modest start in 1973 when two plants with a combined annual capacity of 28 000 m³ were established. Today the Indonesian wood-based panel industry is the largest tropical wood processing facility in the world, with 113 mills in production. In addition, there are 19 independent secondary processing mills which receive raw plywood from other plants. The average-size Indonesian mill has an output capacity of around 60 000 m³ per year. Its share of the global export trade in tropical plywood reached about 50 percent in 1988
Contribution of plywood to Indonesian economy and employment
During 1981 the export earnings of the Indonesian plywood industry were some US$200 million, but by 1990 they hid risen to more than $3 000 million, representing 15 percent of total national foreign exchange earnings and 29 percent of non-oil export income. Even when income loss attributable to the ban on log exports is taken into consideration, the industry's performance has been more than satisfactory.
The impact on employment and income has also been substantial. Forestry department estimates put the total number of people working directly in the logging and wood processing industries in 1991 at more than 425 000, almost evenly divided between logging and processing. However, the industry also makes a substantial indirect contribution to employment through 'the provision of supplies or related goods and services glue factories, technical service and maintenance units, shipping and cargo handling agencies, etc. Overall, the wood processing industries for lumber, particle board, plywood and related industries have created some two million jobs. As well as supporting the dependents of these workers, the forest industry contributes to a better standard of living for nearly ten million people in Indonesia.
TABLE 1. Growth of Indonesian plywood exports
|
Year of mills |
Number ('000m³) |
Export volume (million US$) |
Export value |
|
1977 |
17 |
15.1 |
4.0 |
|
1978 |
19 |
68.1 |
16.7 |
|
1979 |
21 |
140.6 |
40.5 |
|
1980 |
29 |
282.7 |
74.4 |
|
1981 |
40 |
764.3 |
201.0 |
|
1982 |
61 |
1 250.4 |
349.6 |
|
1983 |
79 |
2 023.3 |
584.4 |
|
1984 |
89 |
3 021.1 |
814.2 |
|
1985 |
95 |
3 778.1 |
989.6 |
|
1986 |
96 |
3 335.5 |
882.5 |
|
1987 |
98 |
5 951.4 |
1 892.5 |
|
1988 |
106 |
6 901.5 |
2 310.9 |
|
1989 |
110 |
8 051.2 |
2 709.1 |
|
1990 |
113 |
8 492.7 |
3 013.9 |
Source: Apkindo, 1991.
TABLE 2. Actual and projected employment in Indonesian forestry and forest industries
|
Year |
Logging |
Wood processing |
Total |
|
1989 |
183.6 |
224.2 |
387.8 |
|
1990 |
184.0 |
230.2 |
414.2 |
|
1991 |
190.4 |
234.8 |
425.2 |
|
1992 |
199.6 |
240.4 |
440.0 |
|
1993 |
208.8 |
245.5 |
454.3 |
|
1994 |
218.1 |
250.8 |
488.7 |
|
1995 |
239.8 |
259.7 |
489.3 |
|
2000 |
292.9 |
318.5 |
809.4 |
Source: Indonesian Department of Forestry, 1989.
Distribution and installed capacity
The largest number of mills is located in Kalimantan, followed by Sumatra. It is worth noting that, to date, there has been very little plywood production in Irian Jaya, although this region has large raw material resources and a well-developed sawmilling industry. This can be attributed to an absence of the primary species, meranti. However, as part of development plans to strengthen capacities for utilizing a broader raw material base, three mills, which should have a combined annual output capacity of 193 000 m³, are in the final stages of construction.
Installed capacity was estimated at 6.7 million m³ per year in 1988, but an additional 39 mills with a total capacity of I.3 million m³ were under construction at the time. In addition, a further increase in capacity is expected through the expansion of some existing mills.
Production
Indonesian plywood production has shown a continuous increase in line with the increase in capacity (during the period 1973-1985, production increased at an average of 59 percent per year). The recorded production is actually higher than the indicated capacity since capacity is calculated on the basis of two eight-hour shifts while mill operations usually consist of two ten-hour shifts.
In terms of regional production, in 1985 Kalimantan produced some 55 percent of the total national output, followed by Sumatra (23 percent) and Maluku (11 percent).
Recovery rates
The average recovery in the plywood industry varies from 45 to 58 percent. Recovery rates increase marginally when the thickness of plywood increases and where a larger size of plywood is produced. However, as the majority of Indonesian plywood is less than 5 mm in thickness, an overall recovery rate of 48 percent is estimated for the industry. According to this calculation, log inputs required to produce one cubic metre of raw plywood would be 2.093 m³.
Women workers sorting veneer at an Indonesian plywood mill
It is noteworthy that the major influence on recovery in Indonesian plywood mills is the efficiency of the peeling machines. A number of mills that have already taken steps to increase recovery rates by installing peeling machines suitable for processing smaller-diameter logs have reached average recovery rates of 56 percent. In view of these efforts, future projections are being made on a national average recovery rate of 50 percent.
Government policies concerning the development of the plywood industry have made a significant contribution to the industry's growth. Strict enforcement of regulations ensuring a total ban on log exports in 1980 and the requirement that concessionaires build domestic processing facilities were key factors in the growth of the industry.
However, the resultant rapid production increases (from 1 million m³ in 1980 to 3.9 million m³ in 1984) caused a number of marketing problems, including uneven distribution of product; difficulties of product acceptance; and competition and price-gouging among Indonesian producers. To avoid unhealthy domestic competition, the government decided that only plywood manufacturers could export the panels. In 1984, it authorized the Indonesian Wood Panel Association (APKINDO) to set up seven joint marketing boards to gather and disseminate market and price information; to spread Indonesian plywood exports evenly among importing countries; and to develop a consistent supply and demand policy. More specifically, the marketing boards were empowered to oversee the conclusion of exporters' sales contracts with overseas buyers.
To stabilize prices for different export regions, the government set up an export quota system for regular importing countries. The quota system determines the maximum volume a manufacturer can export to a given importer in a given year. It is based on the past performance of the exporter and his ability to penetrate new markets.
As increased exports of non-oil products are very important to the Indonesian government, it sets export incentives. Credits equivalent to 85 percent of the value of goods exported and repayable within 12 months at an interest rate of 11.5 percent are granted for working capital.
Indonesia has some 144 million ha classified as forest land, i.e. about 74 percent of the country's total land area. The largest concentrations of forest are in Kalimantan and Irian Jaya. The average standing volume of Indonesian forest is estimated to be 260 m³ ha; the average volume of commercial species is estimated at 50 m³ per hectare.
There are around 120 species of timber of commercial importance in Indonesian forests. Teak (Tectona grandis) is grown in Java, Sulawesi and Nusa Tenggara. Meranti, the primary species for plywood production, is the most prevalent non-teak species.
Based on the country's forest land-use plan, about 30 million ha of forests are set aside as protection forests; 19 million ha as conservation forest; 31 million ha as conversion forests to cope with population growth and the need for more agricultural land; and the remaining 64 million ha as production forests.
The 45 percent or so of Indonesia's forests that are open to commercial timber harvesting are very strictly regulated. The government owns the land but, with the exception of those in Java, manages its forests by way of a private concession system. Each concession is allotted an area of land and assigned the right to harvest timber as well as the responsibility of managing the forest. The average size of the concessions is approximately 100 000 ha. They are granted for a period of 20 years and may be extended on the grounds of proven sustainable management. Concessionaires pay a levy based on two components: a forest licence fee and a forest products royalty. The amount of the licence fee is determined by the size of the concession, the period of forest exploitation and the estimated standing volume. The forest product royalty is based on the quantity of forest products traded and the operations and marketing costs.
Concessionaires must prepare annual, five-year and 20-year operating plans. Each concession is divided into 35 blocks and only one block can be harvested per year. Clear-cutting is not permitted and only trees with a diameter of over 50 cm may be harvested. This size restriction, together with the small number of commercially valuable species per hectare, means that on average only five to seven trees are harvested per hectare. For 1991, the Department of Forestry has set the maximum allowable cut at 30 million m³.
Indonesia is hard on companies that: violate its forestry rules. In 1989, 48 concessions were revoked and an additional 37 were suspended. Fines totalling more than US$4 million were levied for cutting outside designated blocks, harvesting more than the allowable cut or felling unauthorized species.
Of course, for forest management to be sustainable, harvesting must be matched by regeneration, whether it be natural or by planting. After logging, concessionaires are required to implement "enrichment planting" if at least 25 commercial trees per hectare, with diameters of between 20 and 50 cm, are not present. Under the enrichment planting programmes, concessionaires hand-plant seedlings, which are grown in forestry nurseries or gathered from the natural forest, in the openings created by logging.
The government is also promoting the establishment of timber plantations on degraded or marginal lands. Thus far, 67 locations in provinces throughout the country have been designated for the development of timber estates. Nearly 130 domestic investment companies have expressed interest in the programme and 20 have been given temporary licences covering an aggregate area of 43 650 ha.
In addition, the government has placed a reforestation tax on concessionaires. Set at US$10 per cubic metre of wood harvested, this tax currently generates some $300 million per year. The revenue is used to replant unproductive or degraded forest lands at an annual rate of approximately 300 000 ha per year. According to the Minister of Population and Environment, Emil Salim, "what [Indonesia] would ideally like is close cooperation from developed countries in a matching fund to help plant the forests".
Overall, log supply is sufficient to provide raw material to all the existing plywood mills for a 20-hour day working pattern. The increasing log balance, indicates that the capacity installation is in line with log production plans and, despite an additional capacity of 1.3 million m³, the log balance for 1990 is positive (about 3 million m³). Even if the additions which are currently under way as well as a further addition of 1.25 million m³ per year (the authorized capacity addition) are achieved by 1993, the log balance will remain positive. Most of the mills will continue to work on their own sources of concession. The exception to this pattern is Sumatra, where mills may have to obtain up to 20 percent of their total consumption of veneer logs (for face veneers) from sources outside the region, probably from Kalimantan.
Raw material shortages, caused not by the plywood industry but by increased domestic consumption of sawnwood could occur around the year 2000. The deficit would remain until around 2020, when the plantations established earlier should start coming into production.
The plywood industry will need to undertake a combination of measures to help minimize the negative effects of log shortages. Capacity additions will have to be minimal beyond the total plywood production capacity of 10 million m³. Development of processing methods to utilize forest residues and lesser known species will need to be accelerated. Equipment in existing mills will need to be upgraded to increase recovery from 50 percent to 55 percent or even more. Over a period of ten years, this would "save" more than 19 mil lion m³ of timber.
Today the wood-based panel industry is an important component in the Indonesian economy. It is second only to oil as an income-earner and, being based on a renewable resource, has greater long-term potential. The short-term and medium-term prospects for the industry are good. With proper land-use planning and resource management, the raw material supplies needed to maintain and further develop the wood panel industry can be provided on a sustainable basis while, at the same time, the ecological functions of the forest are safeguarded.
